Ways and Means Chairman Proposes Carried Interest Reform That Private Equity Lobbying Defeats

House Ways and Means Committee Chairman Dave Camp (R-MI) released comprehensive tax reform draft legislation proposing to raise the tax on carried interest from 23.8% to 35%, effectively closing one of the most notorious tax loopholes benefiting private equity and hedge fund managers. Carried interest allows fund managers to classify their management fees as capital gains rather than ordinary income, saving the industry billions annually. Camp’s proposal represented the most serious congressional attempt to eliminate this preferential treatment, but private equity lobbying—combined with resistance from committee members with industry ties—ensured the reform never advanced.

Carried Interest as Legalized Tax Avoidance

Carried interest treats a portion of private equity and hedge fund profits as investment returns rather than compensation for services, despite managers risking little or none of their own capital. This classification allows managers earning millions or billions in annual compensation to pay capital gains rates (typically 20%) instead of ordinary income rates (up to 37%), reducing their tax burden by nearly half. Warren Buffett famously criticized the loophole, noting that it allowed his receptionist to pay a higher effective tax rate than billionaire fund managers. The loophole cost the Treasury billions annually while concentrating wealth among financial elites who least needed preferential tax treatment.

Private Equity Lobbying Offensive

Investment firms including Cerberus Capital Management and Carlyle Group, along with the Managed Funds Association (the private equity industry’s primary lobbying organization), hired additional lobbyists specifically to defeat carried interest reform efforts. The industry spent tens of millions annually lobbying on tax issues, with carried interest protection among their highest priorities. Lobbyists argued that eliminating the preferential treatment would reduce investment and harm innovation—claims contradicted by economic research showing that the loophole primarily enriched managers without generating broader economic benefits. The Ways and Means Committee, responsible for tax legislation, became ground zero for this lobbying campaign.

Ways and Means Committee Resistance

Despite Chairman Camp’s reform proposal, the committee never advanced carried interest changes to a floor vote. Multiple committee members had received substantial campaign contributions from private equity firms and maintained relationships with industry lobbyists that made them reluctant to support reform. The revolving door compounded this resistance—committee staff knew that supporting carried interest reform could jeopardize future employment prospects with tax-focused lobbying firms serving private equity clients. Even Democrats who publicly criticized the loophole often voted to preserve it when politically expedient, as evidenced by Senator Evan Bayh’s 2010 vote protecting carried interest shortly before joining Apollo Global Management.

Decades of Failed Reform Attempts

Camp’s 2014 proposal joined a long list of failed carried interest reform efforts spanning multiple administrations. Presidential candidates routinely campaigned on closing the loophole—including Donald Trump in 2016—only to abandon reform once elected. The 2017 Tax Cuts and Jobs Act extended the holding period requirement from one to three years but maintained the fundamental loophole, representing what ProPublica called a “sham” reform that appeared to address the issue while preserving the tax benefit. By 2025, the Ways and Means Committee approved tax proposals still containing no changes to carried interest treatment, demonstrating the industry’s complete capture of congressional tax policy on this issue.

Significance

The carried interest loophole exemplified regulatory capture of the tax legislative process by the financial industry. Despite widespread public opposition, economic research showing no societal benefit, and repeated reform proposals, the loophole persisted for decades because private equity successfully lobbied the Ways and Means Committee to protect it. The case illustrated how concentrated industries with enormous financial resources could defeat reform even when logic, fairness, and public opinion overwhelmingly supported change. The revolving door between committee staff and tax lobbying firms created structural incentives against reform—current officials knew that protecting carried interest enhanced their value to future industry employers. The episode demonstrated that the Ways and Means Committee, supposedly writing tax policy to fund government operations fairly, had been captured by the very taxpayers it should regulate most stringently. The persistence of the loophole despite repeated exposure and criticism revealed that congressional committees could be rendered completely dysfunctional in serving public interests when industry lobbying and revolving door incentives aligned against reform.